Employee share plans can be one of the most powerful tools a founder has for attracting and keeping great people — but the thought of giving up hard-won equity can feel daunting. In this article, Sarah Anderson from our expert employee ownership partners, RM2 address the most common concerns founders raise, and explain why many of the perceived obstacles are far more manageable than they first appear.

Using employee share plans can be a great way to incentivise and retain staff in a competitive labour market. However, founders who’ve built a business from scratch will of course be protective about the value they’ve created, and may have doubts about giving up part of their business.

Many of these concerns are extremely manageable. Here are some suggestions for dealing with the questions we’re most commonly asked by founders thinking about employee share schemes. 

I don’t want to lose control of my company

Use “exit only” options. Optionholders don’t get any share rights (eg voting rights or dividend rights) – if a sale happens, options are exercised and shares sold almost simultaneously at the time of a sale.
Alternatively, you could also create a different share class for employees, which carry dividend rights (though probably paid at a different rate to founders) – but no voting rights.

I want to avoid dilution 

Consider creating growth shares with a hurdle to protect existing shareholder value. Alternatively, exit only options will ensure dilution only impacts at the point of sale. Or, if you attach performance targets which only deliver specific levels of option exercise, you can ensure any dilution is balanced by value growth.

I need my plan to be tax efficient 

If possible, make use of government recognised tax advantaged share plans such as Enterprise Management Incentive or Company Share Option Plan. These will suit most independent private companies. In comparison to cash or bonus payments, these schemes will result in charges to capital gains tax for employees rather than income tax and NICs charges. The company can often also benefit from NICs savings and corporation tax deductions.  

Even if your company can’t use these plans (for example, if you want to use subsidiary company shares in your plan), there are other share plan arrangements that can be structured to deliver tax efficiency, usually involving the direct acquisition of shares by employees. 

I want my employees to have skin in the game 

Founders have given up blood, sweat and tears to build their business – it’s only fair that you might want employees to show their commitment by making a financial investment. You can allow employees to acquire shares directly, and pay full market value for their shares. However, you may need to think about how much your employees can afford to pay. High costs can be mitigated by, for example, putting in place delayed payments for shares, or awarding growth shares that will only deliver a return to employees beyond a certain hurdle, requiring a lower financial investment at the outset. 

I don’t want to give up any actual equity 

If you’re still not certain that equity ownership is the right thing for you, you might think about using phantom shares or options, or Long Term Incentive Plans that pay out cash based on the increase in share value over a certain period. These plans aren’t tax efficient, but they can provide incentivisation tied to increased share value without using up precious equity. 
 
If you would like to talk about how an employee share plan can work for you and your business, RM2 Employee Ownership offers a free telephone consultation without cost or commitment. Contact them on enquiries@rm2.co.uk to arrange a call with one of their experts.